The value of cryptocurrency is a hotly debated topic. Some people swear that one cryptocurrency is worth a lot more than another. Others claim that cryptocurrency is a waste of time and energy. The truth lies somewhere in the middle – cryptocurrency is a highly speculative market, meaning that a single coin’s value can change quite quickly.
Value of Cryptocurrency
Since its inception, the bitcoin price has shown a wide fluctuation range. In 2017, its price witnessed massive gains from $1000, reaching its peak at $19000. A dip follows this high price in 2018 and stability in 2019. The question arises, what drives its value and why significant investment is made in this market. This article will discuss this query and understand the underlying value of Bitcoin or any cryptocurrency.
What does "intrinsic value" mean?
In layman’s language, intrinsic value means the value of a commodity or product possesses in itself. There is no need for additional sources to provide value to the underlying item or product. For example, bitterness is the intrinsic value of a bitter gourd. Any item gains its value by the price people are ready to pay. We do transactions by exchanging fiat currency for goods and services in today’s world. This exchange is that the fiat currency can be reused to obtain goods and services.
Some currencies are backed by an equal value of precious metals like silver and gold with intrinsic value. But nowadays, most of the currencies. worldwide are Fiat Currencies.
What is Fiat Currency?
Fiat currency is not strengthened by any physical commodity like silver or gold, and the government issues it. International agencies evaluate the value of fiat currency with factors like the stability of the government and the relationship between demand and supply taken into consideration.
The relationship between demand and supply is calculated using that currency with network participants. For example, suppose I trade $100 notes for purchasing vegetables within a network by exchanging the currency worth $100 for the grocery. With these $100 notes, the storekeeper buys his meal or invests elsewhere to create more value. Thus, Fiat currency or money generates exchange value with the government’s backing.
Like any fiat currency, Bitcoin or any other cryptocurrency is not strengthened by silver or gold, so it does not have intrinsic value. Instead, the value of any currency is established by the trust that people have in the government and the backing of the state. This logic shows that for creating the exchange value within the network, it is crucial for the network to have faith, regardless of who or what is backing it.
The value of Bitcoin or any other cryptocurrency gains its value precisely in the same manner mentioned above. The trust of the millions of investors in the cryptocurrency in an entirely trustless environment determines the cryptocurrency’s value. Participants in the bitcoin network are millions of traders and miners who trust the world’s highly traded cryptocurrency and ascertain its price based on the network’s principles and demand and supply
What is a network effect in the ecosystem of any currency?
In recent years, the popularity of the electronic payment mode is increasing over the traditional transaction method as it involves minimum use of direct value exchange between two parties via the digital medium. Other reasons for the acceleration in popularity are transparency, ease, and accuracy.
In addition, digital payments can be tressed easily. Due to the launch of payment apps and wallet apps like Google Pay, Paytm, PhonePe, etc., cashless payment modes have caught grip. This surge in digital transactions denotes the network effect that highlights the rise in the value of the assets with the increase in the number of people utilizing them.
Even though the routine transactions are made digitally swift, the same is not the case with large or overseas transactions due to the time involved in the transactions subjected to a highly volatile exchange rate.
Cryptocurrencies solve the problems in large transactions due to their features like decentralized infrastructure, ease in the direct money transfers, traceable, quick, immutable, and transparent. Furthermore, cryptocurrencies would get more value with the rise in their adoption due to the adherence to the principles of the network effect. For example, a single phone was not of any use. But, after the surge in the use of phones, their value has increased exponentially.
Intrinsic value from the economic point of view
In economics, it should have two essential characteristics, namely Scarcity and Utility, for gaining value to any commodity. Scarcity denotes a limited supply of goods and services. Many cryptocurrencies, including bitcoin, are fixed, meaning a finite number of these currencies are available in the market. According to the law of demand and supply, the scarcity of bitcoin results in a surge in its desirability over other assets like gold.
Cryptocurrencies like bitcoin are entirely digital and have all the advantages of a digital mode of transaction, such as less time for completing the transaction.
In addition, cryptocurrency is considered a critical mode of factors like transaction time and transactional cost. However, as only two parties are involved in the cryptocurrency transaction, the transaction cost is minimal, just like a cash transaction. Compared with the transaction time engaged in the traditional fiat currencies, the cryptocurrency transaction is effortless and prompt. Global e-commerce companies like Amazon have millions of transactions. These companies have started accepting payments using bitcoin and similar cryptocurrencies.
In conclusion, with the rise in the adoption of electronic modes of payment, cryptocurrencies can perform seamless and swift transactions. Therefore, as more and more people accept cryptocurrencies as a payment mode, their value would also increase as a solid alternative for money. ©
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